Rabin and Thaler's: On Risk Aversion

Matthew Rabin is Professor of Economics, University of California, Berkeley.

Richard Thaler is Professor of Economics and Behavioral Science, University of Chicago, Illinois

Introduction:

Risk aversion, is the topic of this entry in the series… here… the hesitation over risky monetary prospects even when they involve an expected gain-will not strike most economists as surprising. Indeed, economists have a simple and elegant explanation for risk aversion: It derives from expected utility maximization of a concave utility of wealth function. This model is used ubiquitously in theoretical and empirical economic research. Despite its central place, however, we will show that this explanation for risk aversion is not plausible in most cases where economists invoke it.